The new DC tax regime has introduced a number of very attractive tax planning opportunities which include
Children and Non-Working Spouses
The ability to be able to normally contribute up to £3,600 gross to a new DC tax regime scheme, for any individual aged under 75 who is resident and ordinarily resident in the UK, sets up new opportunities for pensioning a child or a non-working spouse.
It should, however, be noted that a legal guardian is required to set up a plan for a child under age 16 (or under age 18, where the child is not employed and is resident in England, Wales or Northern Ireland).
Contributions to the plan can be made on behalf of the member by a third party (who does not have to be related to the member). For example, a father could pay a contribution of up to £2,808 in respect of his child. This would be grossed up to £3,600 by the scheme provider to allow for basic rate tax at 22%. If the father is a higher rate taxpayer he cannot claim any higher rate relief, although if the child is a higher rate taxpayer he/she could claim higher rate relief via his/her tax return.
The ability to pay up to £3,600 gross to a personal pension/stakeholder scheme may also be attractive to those directors of small limited companies who, IR35 notwithstanding, are still able to take most of their income in the form of dividends with only a relatively modest salary (often below the threshold for tax and NI contributions). With the demise of the “de minimis” funding rules under EPP and SSAS, the ability to pay up to £3,600 gross to a DC tax regime scheme is likely to offer the most attractive means of providing for their retirement
Controlling Directors of Investment Companies
Controlling directors of investment companies have been unable to effect an occupational pension scheme under discretionary approval rules and have been unable to treat their earnings as relevant earnings for the purposes of funding a personal pension or S226 contract. As a consequence, where such individuals have wished to make retirement provision they have done so under section 590 of the ICTA 1988. However, this section of the legislation is very restrictive in terms of the benefits that can be provided.
Controlling directors of investment companies are one group of people who are able to particularly benefit from the ability to pay up to £3,600 gross to a DC tax regime scheme provided they are resident and ordinarily resident in the UK.
Members of occupational schemes who are not controlling directors, who are not otherwise eligible to contribute to a DC tax regime scheme, and who have P60 earnings of £30,000 or less can also contribute up to £3,600 gross to a DC tax regime scheme.
For an individual who wishes to make such a concurrent contribution in tax year 2003/04 he/she will need to have had P60 earnings of £30,000 or less in either tax year 2000/01, 2001/2002 or 2002/03. It is important to remember that P60 earnings do not include taxable P11D benefits. Also that P60 earnings are after deduction of any employee contributions to an occupational scheme, or AVCs.
Where an individual's earnings are likely to just exceed the £30,000 earnings limit, an AVC contribution made in tax year 2003/04 could bring his/her P60 earnings within the £30,000 limit and enable contributions up to £3,600 gross to be paid to a concurrent DC tax regime scheme in tax years 2004/05 – 2008/09 inclusive.
Sections 646B and 646D of ICTA 1988
New remuneration strategies for controlling directors have been brought about by:
- the ability to base the DC tax regime contributions for up to six tax years on one tax year's evidenced net relevant earnings (section 646B), and
- the ability to base contributions in the five tax years immediately following the tax year in which relevant earnings have ceased on the evidenced net relevant earnings in the tax year in which relevant earnings ceased or any of the five tax years prior to then (section 646D)
These are considered in more depth in section 11 of this report.
Obtaining More Than 40% Tax Relief
Section 639(5A) of the ICTA 1988 provided that tax relief will be granted on an individual's gross stakeholder/personal pension contributions by extending the individual's basic rate tax band by the extent of the gross contribution.
This can have the effect of providing tax relief at 44.5% where a higher rate taxpayer pays a contribution which results in all or part of his dividend income being brought from higher rate into basic rate tax.
A similar effect will be achieved where chargeable gains are brought from higher rate into basic rate tax as a result of a pension contribution although in this case the relief will be limited to 42%. Advantage is taken here of Extra Statutory Concession A101 which provided that relief should be granted against chargeable gains in such circumstances.